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Spotify, the music service that has enthralled
its European customers and inspired deep envy in U.S. music
lovers, has come to the U.S. By all accounts the service
provides a delightfully fast and seamless user experience.
Now that the service is here, it is worth reviewing just what
this service might mean to the larger music industry.

Daniel Ek, Spotify’s founder, is
perhaps thebest-placedindividual in the world to usher the music
industry into a new age of distribution and a new business
model. The music industry had an awful decade; after
peaking at $27 billion in 1999 worldwide revenue fell to $14
billion in 2008, a -6.4% CAGR. Despite the changes to the
music industry that iTunes has wrought, Spotify represents a larger step into a new
era, in which streaming, not outright sales, is the revenue
driver. A comparison of the U.S. and Swedish music markets
highlights the magnitude of the change still to
come:

In 2010, close to 80 percent of the
labels’ $2 billion in digital revenue in the U.S. came from the
sale of tracks and albums, or, more simply put, iTunes. This is the same basic transaction as
with an Edison cylinder: Give us your money once and you may have
our sound forever. In Sweden, album and track sales together
provide only 20 percent of the country’s $38 million in digital
revenue; 60 percent comes from streaming.

For an industry that has likely had
its fill of innovation, further disruptive change can hardly be
welcome, but change is necessary. TheAchilles’
heelof the music
industry is its dependence on catalog sales (baby boomer
favorites), and not contemporary artists, to drive revenue.
Recently catalog sales were up 7% while sales of current albums
declined 4%.

Spotify
offers more than simply disruption; it may provide a bridge to a
sustainable (and hopefully profitable) future.

The service is considerably more
popular among younger listeners, and as a result it may be the
best weapon the music industry has ever had against
piracy.

Spotify collects, and shares with
music labels, data that can provide invaluable insights.
For instance:

“Jay-Z used to think he was big in London, based
on U.K. album sales; it turns out he’s big in Manchester. Spotify
has discovered that radio plays—on real, terrestrial,
electromagnetic spectrum—still drive interest in artists, as do
Sweden’s summer talk shows.”

The existence of the service may
considerably extend the commercial life of recorded
music. Discussing the current life of product in the
music industry Per Sundin, head of Universal Music in Sweden,
notes: “it used to be six months. Now it’s 10 years.”

The combination of a high quality
user experience, a business model that provides value to the
long-suffering music labels and the length and depth of the
labels’ suffering to this point suggests that it is at least
possible that Spotify could play an integral part in a
long-overdue evolution of the music industry.

David Johnson is a partner with ACM Partners, a boutique financial
advisory firm providing due diligence, performance improvement,
restructuring and turnaround services to companies and
municipalities. He can be reached at 312-505-7238 or at david@acm-partners.com.